Bells And Whistles Used To Sell Trauma Insurance
Sydney Morning Herald
Friday April 25, 1997
Trauma insurance has been hailed as insurance for the '90s. But after three years of expanding the conditions covered to entice people to buy the product, some companies are finding they have bitten off more than they can chew. PHILIPPA TYNDALE reports.
FIERCE competition is not just characteristic of the banks. In recent times life insurance companies also have been playing a dangerous game of one-upmanship, not with housing lending but with trauma insurance.
The big marketing ploy has been to add more and more conditions to the policy, giving the impression that the consumer is getting much more for their money. By adding more bells and whistles, companies are more likely to make it to the preferred lists of research houses.
With some companies it has become a case of how many names you can pin on the same ailment. "There is bit of sleight of hand coming into it in terms of trying to look good in research systems," according to Mr John Butterworth, managing director Life Research.
In doing so, companies are relying on human nature, which tells us more is better. But with trauma insurance that is not necessarily the case, and having an exhaustive list of medical conditions may not guarantee you the best policy.
How does the poor consumer make a comparison between a policy covering 105 conditions, such as Oceanic's, and one covering just six conditions? The price of the product is unlikely to tell you much. "There is no direct relationship between premiums and the medical conditions covered," says Mr Butterworth.
It doesn't matter how many conditions companies tack on, the fact is that 92 per cent of claims are for the "big four" traumas: cancer, heart attack, stroke and bypass operations.
There is limited value in some of those extras and, by being dazzled by the long list, you may be missing out on the best coverage for the conditions you are most likely to encounter.
Mr Ray Miles, managing director of life insurance broking group, Associated Planners, says a good trauma policy will cover both acute conditions, such as heart attack, stroke and cancer, and chronic conditions, such as Alzheimer's disease. However, the critical test of a policy will be in the actual definitions of the conditions covered, he says. The wording of some definitions will be far more restrictive than others.
"Any compromise on the quality of definitions contained within your policy could in the end cost you hundreds of thousands of dollars in the event a claim is declined due to the policy wording," says Mr Stephen Collins, director of marketing, The Profit Centre.
But there is an industry trend towards standardising the definitions companies use on their policies, making it much easier to compare policies.
"The more innovative life offices are returning to the original need for trauma cover and offering appropriate product solutions," Mr Collins says. This means a "no-frills" product with good coverage for the major causes of claim supplemented by a "catch all" benefit to cover the remaining possible causes of claim, he says.
Going back to basics may be the only way companies can avoid a blow-out in costs. Some industry observers say that some current pricing and claims assumptions are pushing up the cost of the product although, of course, no company will own up to having underwriting problems.
Trauma insurance pays a lump sum amount on diagnosis of a life-threatening disease, regardless of whether or not the policyholder survives the illness.
The product allows people many more options on how to adjust their lifestyle to their illness. It is considered to be the product to fill the gap between straight term life cover, and income protection, which pays a percentage of your income. Some products just include trauma cover, some add on a death component that you lose when you make a trauma claim, while others also tack on total and permanent disablement.
Many companies have adopted a "loss of independent existence" benefit to cover conditions that limit your ability to function from day to day, with most defining it as the inability to do three of five activities of daily living without assistance.
Total and permanent disablement as a condition causes some confusion to the buyer. Many people assume that total and permanent disablement is the same thing as disability insurance. However, they are in for a rude shock when they make a claim and discover they are different products. The distinction is often made by companies calling the product income protection, or in the case of Sun Alliance, severe disablement.
Another mutation of the original product is a buy-back option that allows the person insured to buy back the death cover component of the policy, at standard rates, after they have made a trauma claim.
Trauma has been the fastest growing sector of the life insurance industry. From a small base in 1993, there are now more than 300,000 policies in force with an annual premium of more than $150 million. In excess of $80 million already has been paid out in claims.
Minimum annual premiums for trauma policies range between $150 and $400. Most companies have a maximum amount of cover they will provide, generally between $500,000 and $1 million.
Reinsurance company Mercantile and General's latest industry figures show a continuing trend towards a much higher rate of claims in the first year of a trauma policy, unlike the slow build-up of claims over several years that is typical of other types of risk insurance such as income protection or term life.
There is evidence that people are taking out trauma insurance on a hunch or even early signs that something may be wrong with them. The industry calls this "anti-selection" and it may lead to a major rethink on the wording of policies.
In one extreme case in the UK, a perfectly healthy doctor took out a trauma policy for one million pounds, then set out and found a doctor to perform a bypass on his healthy heart. The company paid the claim because it came within the definition of the contract at the time.
In Australia, trauma policies have been particularly popular with women. Apart from being a cheaper product for women to buy than men, trauma insurance fits well with the lifestyle needs of women. For women, breast cancer represents the highest number of claims, while for men it is heart bypass surgery.
Ms Sue Howes, actuarial services manager at Mercantile and General, says the insurance industry is paying for a higher rate of breast cancer claims than occur in the population and that this suggests "anti-selection" is occurring. Claims on trauma policies for heart bypass surgery have fallen but are still higher than the overall population.
In 1995, 28 per cent of claims were turned down, mostly on the grounds of non-disclosure or not falling within the definition of the contract.
WHAT TO CHECK BEFORE YOU BUY
* ASSESS what the potential costs of suffering major trauma are, in terms of medical costs, income replacement and lifestyle changes.
* REVIEW your income protection and life insurance to assess the protection gap that exists in your financial plan.
* ENSURE that both acute and chronic traumas are specified in the policy.
* TEST the definitions of the "top four" acute traumas to ensure you are well covered.
* DOES the policy include a Loss of Independent Existence benefit and a Total and Permanent Disability benefit, to give comprehensive coverage?
SOURCE: Associated Planners.
© 1997 Sydney Morning Herald